Fitch Affirms Illinois Tollway's $4B Revs at 'AA-'; Outlook Negative

CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms its 'AA-' rating on the Illinois State Toll Highway Authority's approximately $4 billion in outstanding toll highway senior revenue bonds. The Rating Outlook is Negative.

RATING RATIONALE:

The 'AA-' rating reflects the following credit strengths:

--Strong regional economic fundamentals, with a stable population base resulting in resilient traffic demand;
--The essential nature of the transportation links serving a heavily travelled metropolitan area with direct connections to an established network of interstate highways;
--Economic flexibility to raise rates;
--Sound historical financial profile;
--Strong liquidity position;
--Track record of proactive financial management;
--Substantial progress in the completion of the authority's Congestion Relief Program (CRP) on-time and under budget that should lead to improved traffic flow across the system.

The 'AA-' rating reflects the following credit concerns:

--Dependence on overall traffic growth, without toll increases, in order to meet targeted toll revenues and maintain debt service coverage ratios;
--Long-term capital investment needs to maintain the toll road in a state of good repair in the event that traffic growth is less than forecasted;
--Increased proportion of toll revenues derived from commercial traffic, which is sensitive to economic cycles;
--Refinancing of existing variable rate demand bonds in the next one to three years.

What May Trigger A Downgrade?

--The authority's inability to meet forecasted traffic levels, unwillingness to raise toll rates, and/or an increase in O&M expenses that lead to current and/or expected DSCRs to drop below 1.8 times (x) may lead to a rating action.
--Weakening of the authority's financial profile in order to meet its current and future capital investment needs could pressure the rating.

What May Change the Rating?

--The state of Illinois delegating additional capital improvements to the authority that are not a part of the tollway system without adequate additional revenues to fund the projects.

SECURITY:

The authority's debt is secured by a pledge and lien on the net revenues of the tollway system. Net revenues are defined in the indenture as the annual revenue of the system less operating expenses. Revenues exclude transfers to the revenue fund from the construction fund and transfers to the trustee by the authority from the system reserve account, the improvement account, or the renewal and replacement account. The Build America direct payment subsidy is not treated as revenues under the indenture.

CREDIT SUMMARY:

The Negative Outlook reflects Fitch's continued concern of lower than expected traffic and toll revenue growth that would reduce the authority's ability to meet its projected coverage of 1.8x given its escalating debt service profile. Fitch recognizes that traffic and revenues increased 5.4% and 5.8% in 2010, respectively (all 2010 numbers provided by the authority are preliminary and unaudited). However, both remain below previous expectations and a catalyst to maintain traffic growth may not be imminent given the continued weak macroeconomic conditions. Fitch expects the authority to meet its current forecast of approximately 885 million transactions in 2011 and/or develop a toll schedule that would keep DSCRs above 1.8x in order to maintain its current rating.

Additionally, the authority needs to continue to generate sufficient cash flow from operations to fund the remainder of the CRP and on-going renewal and replacement. Based on estimates from the consulting engineer, $150-$210 million will be needed annually through 2021. Also, a timeline for the reconstruction of the Jane Addams Memorial Tollway (I-90) is expected to be established in the 10-year capital improvement plan to be completed in 2011. Fitch views the funding of this project without an additional, apportioned toll rate increase as a potential risk to the authority's financial flexibility and may result in a rating action.

The authority operates a network of four toll highways that serve a 12-county area in north-eastern Illinois, including the Chicago metropolitan area. Since the opening of its first highway in 1959, the authority has enjoyed a consistent history of annual gains in traffic and revenue reflecting the steady expansion of the regional economy. However, declines in traffic following the 2005 toll increase, the start of the CRP on much of the system, as well as the 2006 elimination of a mainline toll plaza on the Northwest Tollway (Jane Addams Memorial) section, resulted in a 5.5% overall decline in transactions between 2004 and 2008. Transactions for 2009 were essentially flat, with a 0.3% decline over 2008. However, traffic increased 5.4% in 2010 due to the completion of the majority of the CRP and an improvement in the economic environment.

Toll revenues increased significantly following the toll increase in 2005 (48%) but remained essentially flat through 2009 due to the combined effects of reduced traffic volume and an interruption in billing due to a change in companies that process toll evasions. Meanwhile, revenues were up 5.8% in 2010 as traffic levels began to rebound. Fitch notes the overall resiliency of revenues is consistent with other mature toll-road systems that were subjected to the unprecedented volatility in fuel prices and weakening economic trends in the region. Further, given the scope of the capital projects, revenue trends illustrate the essential nature of the tollway.

The authority's current forecast assumes toll activity will increase from approximately 817 million transactions in 2010 to approximately 946 million transactions in 2015, an aggregate increase of over 15%. Similarly, toll revenues are expected to rise to approximately $782 million by 2015 or over 24% mainly driven by increased commercial traffic. Fitch recognizes the authority's revised outlook no longer projects substantial growth in the first one to three years following the completion of the CRP and instead forecasts approximately 2-4% growth through 2020. However, while the completion of the CRP in high traffic corridors and an economic recovery may serve as catalysts for growth, Fitch believes that traffic growth may continue to under-perform these projections.

The financial profile of the authority has been strong with historical DSCRs in excess of 2.0x coupled with a strong liquidity position. However, DSCRs are expected fall below 2.0x in 2010 to 1.9x and remain in the 1.8x-1.9x range through 2015. This reflects the authority's assumed 3.1% average growth in toll transactions, average operating expense growth of less than 3%, and no adverse developments on the debt interest costs of the approximately $1.3 billion in outstanding variable rate bonds. While management has indicated a goal to maintain debt service coverage at or above 1.8x, it continues to be Fitch's view that current economic conditions could suppress traffic and toll revenues, resulting in financial results moderately below those currently projected. Should this scenario develop, further toll increases may be needed in order to maintain its current credit rating. At this time, the authority has indicated no plans to raise toll rates beyond the previously approved commercial vehicle toll increase scheduled to go into effect beginning Jan. 1, 2015. While such toll increase was previously associated with a capital program that has not been initiated, management has indicated that the increase is likely to remain in place to be available to address future capital needs. Management has not indicated any plans to raise passenger toll rates.

Fitch believes financial margins could be adversely affected to a moderate extent should debt interest costs and/or operating expenses exceed current forecasts. Although synthetic fixed-rate payments are provided through various swap agreements, nearly 30% of the authority's $4.1 billion of outstanding debt remains in variable rate mode, which is down from 40% at Fitch's Nov. 2009 review. Management has indicated that it will seek to further reduce its variable rate debt exposure to 20% in 2011. Fitch views management's proactive financial management to limit the potential for increases to its debt interest costs as a credit strength. The authority forecasts operating costs to increase by an average of 3% per year through 2020, a growth rate measurably below the 5.2% average annual increase from 2004 to 2009.

The Illinois State Toll Highway Commission was established by the Illinois General Assembly in 1953 and became the authority under subsequent legislation passed in 1967. The authority is empowered to provide for the construction, operation, regulation, and maintenance of the Illinois system of toll highways, and has the exclusive right to fix, adjust, revise, and collect tolls for use of the tollway system. The authority can increase tolls by vote of a majority of its board of directors, after conducting a public hearing in each county in which the proposed increase is to occur. No other State of Illinois executive, administrative, or regulatory body or regional/local governmental body has the authority to limit or restrict such rates and charges.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated Aug. 16, 2010;
--'Rating Criteria for Toll Roads, Bridges, and Tunnels', dated Aug. 10, 2010.

Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Rating Criteria for Toll Roads, Bridges, and Tunnels
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=543265

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.